Will a Rising Stock Market Make People Spend More?
Wall Street's feeling better these days and the stock market edges up past its May 2012 highs. Wall Street is, of course, basically a sales organization, so the rising market represents an opportunity in their minds of selling more. Rising stock prices might attract more buyers.
While there's some truth to rising stock prices drawing more people into the market, there's less truth to the idea that a rising stock market makes people spend more, thereby goosing the economy. Where's the evidence that this is the case?
No less an esteemed group than Bernanke and his Fed cohorts speak of the "wealth effect" of a rising stock market. They say that people "feel" wealthier when the price of their stocks go up, and when they feel wealthier, they act wealthier, meaning they spend more.
Indeed, with the Fed's latest decision to initiate $40 billion per month of mortgage bond purchases (QE3), you have to think that the stock market may respond by heading up with even more intensity. (We'll see.)
But there's no real statistical correlation between rising stock prices and increased consumer spending that I'm aware of that bears this out. So it sounds like a lot of oonga-chaga mumbo jumbo.
Even common sense could tell us that this doesn't really ring true. Do you run out and spend more if you notice your brokerage account just went up a few points? Probably not. (And I should hope not!) And the reason probably not is that just as it's rising a few points now, it could fall a few points next month. There's nothing really permanent about the rise in stock prices.
It's not like when you get a raise in salary. Your boss isn't giving you a raise just for this month, only to take it back next month. A raise in salary usually means you have more money to spend. (Of course, you'd be wise to save at least a portion of this, right?) A raise represents a permanent increase in your cash flow (unless you lose your job).
And, of course, we've all read about how people's incomes - at least the incomes of the middle class - have declined over at least the last decade. And those declining incomes have and will result in less spending. Even when we see spending increasing at times, the chances are its the result of people using debt to make purchases, i.e., charging the items on their credit cards. It's not the result of them having more to spend.
So all this talk about "wealth effect" doesn't really make sense in the end. A rising stock market won't make people spend more. If it makes people charge more - take on debt to buy things - then how is that a good thing? That just means people are getting deeper in debt. I don't think even the Fed would claim that's good for the economy. Then again, they're probably OK with anything that gets the economy moving at this point.
While there's some truth to rising stock prices drawing more people into the market, there's less truth to the idea that a rising stock market makes people spend more, thereby goosing the economy. Where's the evidence that this is the case?
No less an esteemed group than Bernanke and his Fed cohorts speak of the "wealth effect" of a rising stock market. They say that people "feel" wealthier when the price of their stocks go up, and when they feel wealthier, they act wealthier, meaning they spend more.
Indeed, with the Fed's latest decision to initiate $40 billion per month of mortgage bond purchases (QE3), you have to think that the stock market may respond by heading up with even more intensity. (We'll see.)
But there's no real statistical correlation between rising stock prices and increased consumer spending that I'm aware of that bears this out. So it sounds like a lot of oonga-chaga mumbo jumbo.
Even common sense could tell us that this doesn't really ring true. Do you run out and spend more if you notice your brokerage account just went up a few points? Probably not. (And I should hope not!) And the reason probably not is that just as it's rising a few points now, it could fall a few points next month. There's nothing really permanent about the rise in stock prices.
It's not like when you get a raise in salary. Your boss isn't giving you a raise just for this month, only to take it back next month. A raise in salary usually means you have more money to spend. (Of course, you'd be wise to save at least a portion of this, right?) A raise represents a permanent increase in your cash flow (unless you lose your job).
And, of course, we've all read about how people's incomes - at least the incomes of the middle class - have declined over at least the last decade. And those declining incomes have and will result in less spending. Even when we see spending increasing at times, the chances are its the result of people using debt to make purchases, i.e., charging the items on their credit cards. It's not the result of them having more to spend.
So all this talk about "wealth effect" doesn't really make sense in the end. A rising stock market won't make people spend more. If it makes people charge more - take on debt to buy things - then how is that a good thing? That just means people are getting deeper in debt. I don't think even the Fed would claim that's good for the economy. Then again, they're probably OK with anything that gets the economy moving at this point.
Comments